DEAL OF THE YEAR: Initial Public Offering

Jan 1, 2013

Santander Mexico $4.1bn IPO

In another weak year for Latin America’s equity
capital markets, two long-awaited bank debuts stood out among
the region’s few IPOs.

Both had the international recognition not to be bound to
the fate of the region’s smaller deals, offering
size and a clear expansion play and getting several times
demand. Both were enormous successes, but in the end Santander
Mexico’s IPO was bigger, has performed better and
is likely to represent more of a watershed moment for its
country’s equity markets than BTG
Pactual’s debut.

For years the Bolsa Mexicana de Valores
directors’ annual claims that next year will see
"a few more IPOs" were met with smirks and giggles.

Buoyed by positive economic forecasts, a steadier pipeline
of Mexican debutants now seems a reality.
Santander’s 52.81 billion peso ($4.11 billion)
debut was the biggest Mexican sale in history and the
region’s largest IPO since Santander
Brazil’s $7.5 billion sale in 2009.

A slate of transactions – Pinfra, Crédito
Real, and Mexichem – immediately followed. More were
on the way as of December, including additional entrants into
the new Fibra real estate fund asset class.

The deal was part of a divestiture plan by the Spanish
parent that was long-expected and much needed. Demand for the
24.9% stake in what is perhaps the group’s
healthiest asset reached 4.8 times.

Following a three-week roadshow visiting 12 countries and 24
cities, some 20% of the deal was placed in Mexico and the
remainder as American Depositary Receipts in New York, with 53%
ending up in the hands of international long-only buyers.

Despite investor appetite, the shares were intelligently
priced at the midpoint, rather than the high end of the
proposed 29.00 to 33.50 peso band. The book included numerous
investors that had not previously invested in the region.

"This is the first time that a Spanish-speaking Latin
American company accesses the market in that magnitude and
generates this kind of demand," says Gérard
Crémoux, head of LatAm investment banking at UBS, global
coordinator on the deal with Santander, Deutsche Bank and Bank
of America-Merrill Lynch.

"There hasn’t been a $20 billion book for a
Spanish-speaking Latin American company ever. This is the
beginning of a new trend."

"People aren’t invested in Mexico," says
Jeffrey Rosichan, vice chairman of ECM at Deutsche Bank. "Few
stocks are liquid. Only one bank was listed, and banks make
great proxies."

The new shares offered an important play into
Mexico’s financial space, becoming only the second
large bank to be publicly traded. In addition to the FIG
sector’s proxy for the consumer demand growth
play, Mexico’s banking sector is famously
underpenetrated in the country’s population. The
lack of clear comparables, however, presented something of a
challenge, says Facundo Vazquez, head of LatAm ECM at Bank of
America Merrill Lynch.

The shares were offered at a discount to the
bank’s slightly smaller rival Banorte, at around
10-11 times 2013 price/earnings compared with
Banorte’s 12 times. The deal valued the bank at
more than $17 billion.

The shares have remained above offer price, and were up 21%
at 37.98 pesos as of December 1. This came versus a 2.4%
improvement in the Mexican index during that time.

Santander now plans to IPO its other major subsidiaries
around the globe, with Argentina’s Santander
Río likely up next in LatAm – assuming the
political climate in the country allows for it.

In an unusual year where ex-Brazil issuance was greater than
Brazilian issuance, bankers, investors and others are hopeful
the shift towards greater non-Brazilian deals is permanent.
Brazil’s large investment banks are beefing up
their operations outside of Brazil in anticipation –
even in Mexico, as Itaú’s participation in
the transaction demonstrates.

Even if the percentage of new ECM issuance in the region
tips back in Brazil’s favor in 2013 – and
bankers say it could easily do so if the right names come at
intelligent price levels – all signs point to a
continued increase in volume from outside of Brazil.

While Santander Mexico undoubtedly is the most significant
ex-Brazil deal in years and has created a tangible market
opening, the permanent effects in Mexico’s new
issue market are far from clear. Liquidity, and the large
volume the in the index of stocks of businesses controlled by
industrialist Carlos Slim, remains an issue.

Moreover, the country’s small and mid-size
corporate owners are still more reluctant than the regional
average to open their companies up to a public listing. The job
ahead is difficult, but Mexico could not have asked for a
better start. LF

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